Can You Take a Loan Out on Your Car?

While a traditional auto loan facilitates the purchase of a car, it is also possible to leverage an already owned vehicle to secure financing. This approach involves borrowing money against the car’s value, using it as collateral. Understanding the mechanisms and requirements for such loans is important. This article explores common ways an owned car can serve as a basis for obtaining a loan.

Types of Loans Using Your Car

Using a car to secure a loan typically involves two primary methods: car title loans and cash-out auto refinances.

A car title loan involves using the clear title of a vehicle as collateral. The borrower generally retains possession and use of their car during the loan term. These loans are often short-term, typically spanning 15 to 30 days, though some may extend up to 60 days. Interest rates on car title loans are considerably high, frequently ranging from 200% to 300% Annual Percentage Rate (APR). The loan amount is usually a percentage of the vehicle’s market value, often between 25% and 50%.

Conversely, a cash-out auto refinance is an option for individuals who currently have an outstanding auto loan on their vehicle. This process involves obtaining a new, larger loan that pays off the existing auto loan. The difference between the new loan amount and the payoff amount for the old loan is then disbursed to the borrower in cash. This refinance requires the borrower to have established equity in their vehicle, meaning the car’s value exceeds the remaining loan balance. Lenders assess factors such as credit history and vehicle equity to determine eligibility and loan terms.

Preparing for a Car-Based Loan

Preparation is essential before pursuing a car-based loan to increase the likelihood of approval and understand potential terms. This involves assessing the vehicle’s financial standing and gathering necessary documentation.

Understanding your car’s value and equity is a key step. Lenders commonly use established valuation guides, such as Kelley Blue Book (KBB) or NADA Guides, to determine a vehicle’s market worth. For a cash-out refinance, sufficient equity is paramount; this is calculated as the car’s current market value minus any outstanding loan balance. For a car title loan, the vehicle must typically be fully owned with a clear title, meaning there are no existing liens against it.

Gathering the required documentation is important. Proof of ownership is necessary, which includes a clear car title for title loans or existing loan statements for a refinance. Lenders will also require proof of income, often verified through recent pay stubs, bank statements, or tax returns, to assess repayment capacity. Identity and residency verification typically involves a valid government-issued identification, such as a driver’s license, and documents like utility bills or lease agreements. Additionally, vehicle information, including the Vehicle Identification Number (VIN), make, model, year, mileage, and current condition, is routinely requested. Proof of current auto insurance is also a common requirement.

Meeting general lender eligibility criteria is also important. Most lenders require applicants to be at least 18 years of age and a resident of the state where the loan is sought. While car title loans may have less stringent credit score requirements due to the collateral involved, a cash-out auto refinance generally necessitates a favorable credit history for better terms. Lenders for cash-out refinances often look for a loan-to-value (LTV) ratio of 80% or less, though some might consider higher LTVs for qualified borrowers.

Applying for and Receiving Your Loan

After preparing all necessary information and documents, the next phase involves the application and funding process. Understanding each step can help streamline the experience of securing a car-based loan.

First, identify a suitable lender for the specific loan type. Specialized title loan companies and online lenders often provide car title loans. For cash-out auto refinances, traditional financial institutions like banks and credit unions, as well as online auto lenders, are common sources. Exploring different lenders allows for a comparison of terms and rates.

Once a lender is chosen, complete their loan application form, either online or in person. The gathered documentation is submitted with the application, initiating the lender’s review.

The evaluation for both loan types includes a vehicle inspection and appraisal. Lenders will typically assess the car, often through physical inspection or virtual review, to confirm its condition and appraise its market value. This appraisal helps determine the maximum loan amount that can be offered.

Following evaluation, the lender notifies the applicant of their approval status and proposed loan terms. If approved, the borrower signs the loan documents, which detail the interest rate, fees, and repayment schedule. Funds are then disbursed, typically through direct deposit, a check, or sometimes cash.